Financial Trend Monitoring System (FTMS)

Transcription

1 Financial Trend Monitoring System (FTMS) For Fiscal Year Ending June 30, 2011 Prepared by the Financial Services Dept. Town of Payson Town Hall 303 N Beeline Hwy. Payson, AZ Phone: Fax:

2 Table of Contents Introduction 1 Factor 1 Revenue Indicators 7 Indicator 1 Analysis Revenue per Capita 8 Indicator 2 Analysis Restricted Revenue 12 Indicator 3 Analysis Intergovernmental Revenues 15 Indicator 4 Analysis Elastic Tax Revenues Sales Tax 18 Indicator 5 Analysis One Time Revenues 21 Indicator 6 Analysis A&B Sales Tax and Property Tax Revenues 24 Indicator 7 Analysis Uncollected Property Taxes 29 Indicator 8 Analysis User Charge Coverage 32 Indicator 9 Analysis Revenue Shortfalls 35 Factor 2 Expenditure Indicators 37 Indicator 10 Analysis Expenditures per Capita 39 Indicator 11 Analysis A, B, C, D, E - Expenditures by Functions 42 Indicator 12 Analysis Employees per 1,000 Capita 48 Indicator 13 Analysis Fixed Costs 50 Indicator 14 Analysis Fringe Benefits 53 Factor 3 Operating Position 56 Indicator 15 Analysis Operating Deficit or Surplus 57 Indicator 16 Analysis Enterprise (Water) Operating Position 59 Indicator 17 Analysis Fund Balances 61 Indicator 18 Analysis Liquidity 63 Factor 4 Debt Indicators 65 Indicator 19 Analysis Current Liabilities 66 Indicator 20 Analysis Long-term Debt 68 Indicator 21 Analysis Debt Service 71 Indicator 22 Analysis Overlapping Debt 73 Factor 5 Unfunded Liability Indicators 75 Indicator 25 Analysis Accumulative Employee Benefit Liability 76 Factor 6 Capital Plant Indicators 79 Indicator 26-A&B Analysis Maintenance Effort Streets & Parks 80 Indicator 27 Analysis Capital Outlay 84

3 Factor 7 Community Needs and Resources Indicators 86 Indicator 28 Analysis Population 87 Indicator 29 Analysis Population Density 90 Indicator 30 Analysis Median Age 92 Indicator 33 Analysis Property Value 94 Indicator 34 Analysis TOP Five Taxpayers 96 Factor 8 Intergovernmental Constraints 99 Factor 9 Natural Disasters and Emergencies Risk 100 Factor 10 Political Culture 101 Factor 11 External Economic Conditions 102 Factor 12 Management Practices and Legislative Policies 104 Analytical Techniques 116 Figure 1 117

4 Introduction This handbook provides the Town of Payson with a method for monitoring the Town's financial condition. You can use this handbook to: Better understand the Town's financial condition--the forces that affect it and the obstacles associated with measuring it. Identify existing and emerging financial problems. Develop actions to remedy these problems. The evaluation of financial condition is accomplished through the Financial Trend Monitoring System (FTMS), which identifies and organizes the factors that affect financial condition so that they can be measured and analyzed. The handbook suggests that the completed analysis of financial condition be compiled and presented in a report to be made available to the Town's policy makers as well as citizens, committees, employees, bond rating agencies, and others interested in the Town's financial health. It also suggests that each year the indicators should be updated so that the monitoring of financial condition is ongoing. Automating the FTMS with spreadsheet software makes this task much easier What is financial condition? The term financial condition has many meanings. In a narrow accounting sense, it can refer to a government's ability to generate enough cash over thirty or sixty days to pay its bills. This definition of financial condition can be called cash solvency. Financial condition can also refer to a government's ability to generate enough revenues over its normal budgetary period to meet its expenditures and not incur deficits. This is often referred to as budgetary solvency. In a broader sense, financial condition can refer to a government's ability in the long run to pay all the costs of doing business, including expenditures that normally appear in each annual budget, as well as those that will appear only in the years in which they must be paid. Pension costs and payments for accrued employee leave are examples of the second type of expenditures. Although these costs will eventually appear in a budget or otherwise make them known, a short-run financial analysis (one to five years) may not reveal them. This long-run balance between revenues and costs warrants separate attention and is referred to here as long-run solvency. Finally, financial condition can refer to a government's ability to provide services at the level and quality that are required for the health, safety, and welfare of the community and that its citizens desire. This will be referred to as service-level solvency. A government lacking service-level solvency might in all other respects be in sound financial condition, but be unable to support police and fire 1

5 services at an adequate level, and suffer cash, budgetary or long-run solvency problems if it tried to provide adequate services. Because few local governments face such severe and immediate financial problems that they are likely to default on loans or fail to meet current obligations, this handbook uses a broad definition of financial condition that encompasses all four types of solvency. The handbook is designed for any local government that finds itself in one or more of the following situations: The government is under the strain of a few identifiable financial problems and wishes to gain a broader perspective on these problems. The government senses that financial problems are emerging but is having difficulty pinpointing their origin or developing a strategy for coping with them. The government is in good financial condition but needs a systematic way to monitor changes and anticipate future problems. In summary, financial condition can be broadly defined as a local government's ability to (1) maintain existing service levels, (2) withstand local and regional economic disruptions, and (3) meet the demands of natural growth, decline, and change. Maintaining existing service levels Local governments in sound financial condition can afford to continue paying for the services they now provide. In addition to basic services funded by local revenues, this would include the ability to maintain programs that are currently funded by external sources such as federal grants. Current service levels also include the maintenance of capital facilities, such as streets and buildings, in a manner that protects the initial investment and keeps the facilities in usable condition. Finally, continued provision of services requires funds for future liabilities that may currently be undaunted, such as pension, employee leave, debt, and lease-purchase commitments. Withstanding economic disruption Sound financial condition also implies the ability to withstand local, regional, and national economic disruption. An example would be the end of the Cold War, with the related decrease in defense spending by the federal government, which affects the industries, employment patterns, and tax base in many local economies. The recession of the early 1990's that saw many companies go out of business, raising unemployment rates, contributing to tax delinquencies, and reducing the investment income of local governments by lowering interest rates, is another example of an economic disruption. Meeting demands of growth and demand Even stability can create financial pressure: a population that remains stable but that changes composition, becoming poorer or older, for example, can have an impact on a local government's financial health. An older population can require 2

6 new government programs, with expensive start-up costs; older taxpayers may be less willing to support a tax increase if their income is limited to pensions and Social Security. A growth in the number of younger residents, on the other hand, can lead to demands for higher expenditures in areas such as education and recreation. The basic questions that officials must address are Can the local government continue to pay for what it is now doing? Are there reserves or other vehicles for financing emergencies? Is there enough financial flexibility to allow the government to adjust to change? If a government can meet these challenges, it is in sound financial condition. If it cannot, it is probably experiencing or can anticipate problems. Obstacles to measuring financial condition Is your local government in good financial condition? To answer this, you first need to be able to measure financial condition. If we had chosen a definition of financial condition that considered only cash and budgetary solvency, we would narrow the range of issues, but the conclusions about your local government's long run financial condition would be incomplete. Although including long run and service-level solvency helps us to achieve a more accurate picture of overall financial condition, it also creates a number of problems. These problems are related to (1) the nature of a public entity, (2) the state of municipal financial analysis, and (3) the character of municipal accounting practice. The nature of a public entity Private firms can easily determine whether they are financially sound. The basic test is dollar profit, which roughly translates into efficiency. For the public entity, profit is not a motive and efficiency is only one of many objectives. A public entity's objectives include health and welfare," "political satisfaction," and other qualities that can be measured only subjectively. We must recognize that including service-level solvency in our definition of financial condition renders our measurements less exact. Municipal financial analysis Public finance practitioners and researchers are primarily concerned with cash and budgetary solvency and have given little attention to long run and servicelevel solvency. The exception has been the investment community, but it has concerned itself more specifically with debt-carrying capacity. Although many analysts have broadened their concerns during the last decade, the Financial Trend Monitoring System used in this handbook remains the most comprehensive, practical way to evaluate the financial condition of an individual local government. Another concern for conducting municipal financial analysis is the lack of normative standards for the financial characteristics of a local government. What, for example, is a healthy per capita expenditure rate, level of reserves, or 3

7 amount of debt? The credit-rating industry has many benchmarks for evaluating local government, but these benchmarks have to be considered in combination with more subjective criteria, such as the diversity of the government's tax base or its proximity to regional markets. Some attempts have been made to develop standards by averaging data for various local governments or otherwise comparing one community to another. But communities differ widely, in characteristics such as size, geography, demographics, revenue structure, and responsibility or authority to provide services. Because of the uniqueness of each jurisdiction and the lack of sufficient objective data, these interjurisdictional comparisons have not gained authoritative acceptance. Municipal accounting practices Local government accounting systems have long been based on "audibility" and on giving high visibility to the dollars passing through government accounts. Accounting systems typically stress legal compliance and tracking the path of each dollar in and out of the local treasury. Thus, fund accounting has been regarded as more important than program cost accounting and the measurement of long-term financial health. As a result, most local governments produce budgets showing revenues and expenditures, and most states require municipalities to balance their budgets in one fashion or another. Most governments also produce year-end financial statements that include balance sheets and operating statements. These reports show the flow of dollars in and out of the government during a particular year, but they do not provide the information needed to evaluate long-run financial condition. Generally, financial statements and budgets do not show in detail the costs of each service provided, nor do they show on an annual basis all costs that are being postponed to the future. Financial statements and budgets do not necessarily show the accumulation of unfunded pension liabilities or employees benefit liabilities. They do not show the reductions in purchasing power caused by inflation or the decreasing flexibility in the use of funds that results from increasing state and federal mandates. Financial statements and budgets do not show the erosion of streets, buildings, and other fixed assets. Nor do they relate economic and demographic change to changes in revenue and expenditure rates. Finally, these reports are prepared only for a one-year period and do not show in a multiyear perspective the emergence of favorable or unfavorable conditions. What is the Financial Trend Monitoring System? Evaluating a jurisdiction's financial condition is a complex process that involves sorting through a number of factors. The factors include the national economy, actions of the state and local government, population level and composition of the community, the local business climate, and the internal finances of the local government. Not only are there a large number of factors to evaluate, many of them are also difficult to isolate and quantify. 4

8 Relations between the factors add to the complexity. Some are more important than others are, but often this cannot be determined until all the factors have been assembled. For example, absolute revenues may be higher than ever and may be exceeding expenditures by a comfortable margin. However, if local officials do not consider that inflation for the last ten years has cut purchasing power by well over half, and that street maintenance has been deferred as a result, they may be lulled into thinking that the community's financial condition remains as healthy as ever. In the face of this complexity, the lack of complete accounting data, and the lack of accepted theories and normative standards, one might ask, is it possible to rationalize the evaluation of financial condition? The answer is yes. Regardless of the obstacles, local officials can still collect a great deal of useful information, even if this information is only part of what there is to know. Although medical science has learned little about the human body compared to what remains to be learned, this does not prevent doctors from using what they do know to diagnose and prevent disease. The Financial Trend Monitoring System (FTMS) identifies the factors that affect financial condition and rationally arranges them to facilitate analysis and measurement. It is a management tool that pulls together information from a government's budgetary and financial reports. Combines it with economic and demographic data, and creates a series of financial indicators that, when plotted over time, can be used to monitor changes in financial condition and alert the government to future problems. The indicators deal with thirty-six separate issues, including external revenues, fund balances, liquidity, unfunded liabilities, and business activity. The trend monitoring system is designed to help a local government make sense of the many factors that affect financial condition and develop quantifiable indicators. It will also help the local government use these indicators to: Gain a better understanding of the government's financial condition Identify emerging problems before they reach serious proportions Identify existing problems of which local officials may be unaware Present a straightforward picture of the government's financial strengths and weaknesses to elected officials, citizens, credit-rating firms, and other groups with a need to know Introduce long-range considerations into the annual budgeting process Provide a starting point for elected officials in setting financial policies. The particular advantages of this approach are that the trend monitoring system: Offers a way to quantify a significant amount of information Relies on data that already exist in a government's records or are otherwise reasonably available 5

9 Is designated for "in-house" use and does not require complicated mathematical techniques or computer procedures (although a personal computer can be used to perform calculations and generate graphs) Places the events of a single year into a longer perspective and permits local officials to follow changes over time Incorporates benchmarks normally used by credit-rating agencies. The system cannot explain specifically why a problem is occurring, nor does it provide a single number or index to measure financial health. What it does provide are flags for identifying problems, clues about their causes, and time to take anticipatory action. Analyzing trends in an orderly manner may help clarify what policies should be recommended for implementation to reverse an adverse trend. Caution should be exercised to make sure you don t adopt a new policy that then leads to unintended consequences. Systematic analysis will permit the manager or administrator to begin to understand what is necessary to effect a needed change. 6

10 Factor 1 Revenue Indicators Revenues determine the capacity of a local government to provide service. Important issues to consider in revenue analysis are growth, flexibility, dependability, diversity, administration, and elasticity. (Definition: an elastic revenue can be defined as one that directly responds to changes in inflation and the economic base; i.e., as inflation and the economic base increase, elastic revenues increase in roughly the same or greater proportion, whereas, if inflation declines or the economic base shrinks, elastic revenues drop in proportion.) Under ideal conditions, revenues would grow at a rate equal to or greater than the combined effects of inflation and expenditures. They would be sufficiently flexible (free from spending restrictions) to allow adjustments to changing conditions. They would be balanced between elastic and inelastic in relation to inflation and the economic base; that is, some would grow with inflation and the economic base and others would remain relatively constant. Analyzing revenue structure will help to identify the following types of problems: Deterioration of revenue base Practices or policies that may adversely affect revenue yields Poor revenue-estimating particles Inefficiency in the collections and administration of revenues Over dependence on obsolete or intergovernmental revenue sources User fees that are not covering the cost of services Changes in the tax burden on various segments of the population 7

11 Indicator 1 Analysis Revenues per Capita Examining per capita revenues shows changes in revenues relative to changes in population size. As population increases, it might be expected that revenues (and the need for services) would increase proportionately, and therefore that the level of per capita revenues would remain constant in real terms. If per capita revenues are decreasing, the government may be unable to maintain existing service levels unless it finds new revenue sources or ways to save money. This reasoning assumes that the cost of services is directly related to population size. Warning trend: Decreasing net-operating revenues per capita. A key part of this indicator is that it adjusts for inflation (i.e., current dollars are converted to constant dollars ) and then calculates the revenues per capita. This indicator also introduces the concept of net operating revenues, a combination of revenues from several different funds to determine which revenues are available for general government operations. Suggestions for analysis: If the warning trend is observed, try to identify the causes (Why is it happening?), assess the significance (Is it important?), and devise action strategies (What can be done?). The following are starting points for this analysis. If revenues are decreasing, the following issues should be considered: Is the community experiencing general economic decline? Is the decline a temporary or continuing trend? See indicator 28, Community Needs and Resources. Is the decline related to changes in population, such as a decrease in population groups that historically generated the largest portions of revenue? See indicators Is the decline due to problems inherent in the revenue structure, such as over-dependence on elastic revenues during a period of inflation? See indicator 4, Elastic Tax Revenues Are state or local restrictions (such as tax limitations) preventing the community from instituting the appropriate taxes, fees, or charges? Can revenues be increased by any of the following measures? 1. Revising revenue collection procedures, 2. Reducing tax delinquencies, 3. Instituting or increasing service charges, fines and penalties, license and permit fees, 4. Instituting or increasing charges for use of facilities, equipment or personnel, 5. Updating property assessments, 8

12 6. Establishing special assessment districts, 7. Investing a greater proportion of idle cash, 8. Selling surplus property or equipment, 9. Securing special-purpose or grant funding from public or private agencies. If revenues per capita are increasing, the following issues should be considered: Is it reasonable to assume that the increased level of revenues will continue? If these revenues are being used for new programs that will require continued funding, what plans does the government have for the time when these revenues are no longer available? Is the increase in revenues per capita a sign that costs will increase in future years-as would be the case, for example, if the new revenues were derived from an increase in building construction? Will the additional revenues cover the additional costs? If not, is there a plan for funding these costs? Is the increase in revenues per capita due to a decline in population rather than to an increase in revenues? If so, will the decline in population eventually create a decline in revenues? Is the decline in population accompanied by an increase in the number of smaller households, which can result in higher service costs to the jurisdiction? See indicators 28, Population, and 29, Population Density. Do the increased revenues per capita represent an increase in the tax burden measured by comparing changes in revenues per capita to changes in personal income, business income, or other measures of community wealth? If the tax burden is increasing, will residents and business owners be less able to pay? Might they be tempted to relocate to a jurisdiction that has a lower tax burden? Suggestions for further analysis When analyzing revenues, officials should develop trend lines for both (1) total revenues per capita and (2) any individual revenue source that makes up 5 percent or more of total revenues, such as property taxes, business licenses, transient occupancy taxes, fines and user fees. Within the typical local government's accounting records, these revenues may be segregated into their own fund or grouped within a larger fund such as a general or a special revenue fund. Accordingly, each fund should be broken down into its component revenues so that the revenues can be examined individually. If the government organizes its revenues into specific groups, such as restricted, unrestricted, or self-supporting, then these groups can also be a focus of additional analysis. You may also want to consider whether the revenue structure has changed over the past five years. This can tell you if some revenue sources are growing faster than others, if the revenue burden is shifting from one segment of the population to another (e.g., from property owners to utility consumers), and if the growth in the rates of some revenues has not been keeping pace with that of others. Any such changes in revenue structure should probably receive attention from policy makers. To examine changes in revenue structure, construct a table listing all 9

13 major revenues (e.g., those over 5 percent of total operating revenues) for each of the years you want to examine. Can revenues be increased by? : Revising revenue collection procedures Reducing tax delinquencies Instituting or increasing service charges, etc. Instituting or increasing user fees for facilities and equipment Updating property assessments Establishing special assessment districts Investing a greater proportion of idle cash Selling surplus property or equipment Securing special-purpose grant funding Is it reasonable to assume that the increased level of revenues will continue? Is an increase in revenues per capita a sign that costs will increase in future years-- as would be the case, for example if the new revenues were derived from an increase in building construction? Suggestions for policy statements Policy statements can be developed to suggest procedures for budgeting and analyzing revenues. The following policy statements can help local officials relate this indicator to their financial decision making. A diversified and stable revenue system will be maintained to shelter the government from short-run fluctuations in any one revenue source. Revenues for the next years will be projected and updated annually. Each existing and potential revenue source will be re-examined annually. 10

14 INDICATOR 1 Revenues per Capita Warning Trend: Decreasing net operating revenues per capita (constant dollars) Formula: Net operating revenues & transfers (constant dollars) Population Dollars Revenues per capita Fiscal Period Fiscal year: Net operating revenues and transfers* 12,992,865 14,033,611 13,837,763 16,052,810 18,820,335 18,566,629 18,255,637 16,100,439 15,001,076 15,185,519 Consumer price index Net operating revenues & transfers (constant dollars) 7,222,271 7,639,418 7,294,551 8,253,373 9,476,503 8,913,408 8,343,527 7,464,516 6,882,332 6,727,532 Current population 14,052 14,819 15,200 15,375 15,430 16,742 16,965 17,281 17,281 15,301 Net operating revenues & transfers per capita (constant dollars) * Operating revenues and transfers: general fund revenues plus operating transfers from other funds and increase in obligations under capital leases and appropriated fund balance where applicable. Description: Examining per capita revenues shows changes in revenues relative to changes in population size and rate of inflation. As population increases, it might be expected that revenues and the need for services would increase proportionately, and therefore that level of per capita revenues would remain at least constant in real terms. If per capita revenues are deceasing, the government may be unable to maintain existing service levels unless it finds new revenue sources or ways to save money. This reasoning assumes that the cost of services is directly related to population size. Note: Although the indicator is showing an increase, this is largely due to the dramatic change in population experienced in The Net operating revenue & transfers (in constant dollars) has continued to decline as compared to previous years. 11

15 Indicator 2 Analysis Restricted Revenues Warning trend: Increasing amount of restricted operating revenues as a percentage of net operating revenues. Suggestions for analysis: If the warning trend is observed, try to identify the causes (Why is it happening?), assess the significance (Is it important?), and devise action strategies (What can be done?). The following are starting points for this analysis. Is the trend due to a decrease in unrestricted revenues? If so, see indicator 1, Revenues per Capita. If restricted revenues are supporting new programs or a higher level of service, will the revenues continue to be available, or will the local government have to assume the responsibility for the programs or services in the future? Are unrestricted sources subsidizing restricted revenue programs? Is the local government using a portion of the restricted revenues to support central accounting, personnel, and other overhead services? Can revenue restrictions be removed by local choice, such as a charter revision or council policy? If not, can the local government join with other jurisdictions to persuade federal, state, or other authorities to remove the restrictions? Suggestions for further analysis: You may want to specify the services supported by the restricted revenues, which would tell you where the government is vulnerable to changes in the restricted revenues, you could construct a chart containing the following criteria: Restricted revenue - List each of the restricted revenues and identify the service or expense area to which it contributes, including any overhead activities such as accounting or personnel. Service it funds or contributes to- Is service essential? (Rate 1-5) - Assess how essential this service is to local government and its citizens. Rate the service from 1 (very essential) to 5 (not very essential). Other possible revenue sources - List other revenue sources that could fund the service if the restricted revenue source were withdrawn. 12

16 Will Revenue Continue? (Rate 1-5) - Rate the likelihood that the revenue source will continue: Is legislation proposed or pending? Are "public Interest" or "industry" organizations offering vocal support for, or opposition to, the revenue? Rate the likelihood from 1 (very likely) to 5 (not very likely). Suggestions for policy statements: There are no benchmarks for setting the amount of restricted revenues desirable in a budget; you will need to consider the above set of criteria and decide when the level of restricted revenues--and their areas of use--appears to be threatening your government's financial health in the short or longer term. 13

17 INDICATOR 2 Restricted Revenues Restricted revenues as a percentage of operating revenues Warning Trend: Increasing amount of restricted operating revenues as a percentage of net operating revenues. Formula: Restricted operating revenues Net operating revenues 35% 31% 27% 23% 19% 15% Fiscal Period Fiscal year: Net operating revenues 12,992,865 14,033,611 13,837,763 16,052,810 18,820,335 18,566,629 18,255,637 16,100,439 15,001,076 15,185,519 Restricted operating revenues 3,117,729 3,776,558 3,389,823 4,264,473 5,486,088 4,779,055 4,059,894 3,335,556 3,194,551 3,979,897 Restricted operating revenues as a % of net operating revenues 24.00% 26.91% 24.50% 26.57% 29.15% 25.74% 22.24% 20.72% 21.30% 26.21% Description: A restricted revenue is legally earmarked for a specific use, as may be required by state law, bond covenants, or grant requirements. For example, many states require that gas tax revenues be used only for street maintenance or construction. From one perspective, it would seem that many of these restrictions, especially those relating to outside funding should not affect a local governments financial health. The government has the option of not accepting the revenue and not providing the service. This option, however, is not always easy to exercise: governments develop economic and political dependencies on these revenues and on the programs they support. Moreover, many governments finance their own essential services with intergovernmental revenues, which makes it doubly hard to cut them out. As the percentage of restricted revenues increases, a local government loses its ability to respond to changing conditions and to citizens' needs and demands. Increases in restricted revenues may also indicate over-dependence on external revenues and signal future inability to maintain service levels. 14

18 Indicator 3 Analysis Intergovernmental Revenues Intergovernmental revenues (revenues received from another government entity) are important because an over-dependence on such revenues can be harmful. The federal and state governments have struggled with their own budgetary problems in the last decade, and frequently they have withdrawn or reduced payments to local governments as one of their cutback measures. Local governments with budgets largely supported by intergovernmental revenues have been particularly harmed during this period, but almost all have shared the pain. The reduction of intergovernmental funds leaves the municipal government with the dilemma of cutting programs or funding them from general fund revenues. Nevertheless, a municipality might want to maximize its use of intergovernmental revenues, consistent with its service priorities and financial condition. For example, a city might want to rely on intergovernmental revenues to finance a federally or state mandated service or to fund a one-time capital project. The primary concern in analyzing intergovernmental revenues is to know and monitor the local government s vulnerability to reductions of such revenues, and to determine whether it is controlling its use of the external revenue - or whether these revenues are controlling local policies. Warning trend: Increasing amount of intergovernmental operating revenues as a percentage of gross operating revenues. Suggestions for analysis: If the warning trend is observed, try to identify the causes (Why is it happening?), assess the significance (Is it important?), and devise action strategies (What can be done?). The following are starting points for this analysis. Does your local government depend on intergovernmental revenues to fund ongoing, basic services? Do you have contingency plans in case the revenues are significantly reduced or discontinued? Have fixed-term grants for special programs been accepted? Will the local government be able to continue the special programs when such grants end? What will be the political, social, and economic consequences if such programs are discontinued? Are matching funds for intergovernmental revenues increasing as a percentage of operating expenditures? What is the local government's dollar commitment in matching funds, additional reporting requirements, or unreimbursed overhead costs? Have all these costs been anticipated, budgeted, and recorded? 15

19 Are intergovernmental revenues authorized by ongoing agreements, as in the sharing of sales tax by a state and city? Do the agreements suggest that the revenues will continue, and at what level? Suggestions for further analysis: To demonstrate the role of intergovernmental revenues in your government s financial health, you might want to create tables, bar graphs, or pie charts showing the major sources and uses of such revenues and any expected changes in the revenues you receive. Suggestions for policy statements: While it would be difficult to set definitive policy guidelines on levels or kinds of inter-governmental revenues, it is feasible to set guidelines on procedures to be followed-before grants and other revenues are accepted. The following policy statements can help local officials relate this indicator to their financial decision making. All potential grants shall be carefully examined for matching requirements (both dollar and level-of-effort matches). The funds necessary to match intergovernmental grants shall not exceed percent of net operating revenues. Intergovernmental revenues used for operating purposes shall not exceed percent of net operating revenues. Intergovernmental assistance shall be used to finance only those capital improvements that are consistent with the capital improvement plan and local government priorities, and whose operating and maintenance costs have been included in operating budget forecasts. 16

20 INDICATOR 3 Intergovernmental Revenues Warning Trend: Increasing amount of intergovernmental operating revenues as a percentage of gross operating revenues. Formula: Intergovernmental operating revenues Gross operating revenues Intergovernmental revenues as a percentage of gross operating revenues 45% 42% 39% 36% 33% 30% Fiscal Period Fiscal year: Intergovernmental operating revenues 4,985,725 5,729,338 5,194,093 6,003,178 7,623,574 7,205,813 7,008,009 6,247,098 5,876,427 5,898,253 Gross operating revenues 12,992,865 14,033,611 13,837,763 16,052,810 18,820,335 18,566,629 18,255,637 16,100,439 15,001,076 15,185,519 Intergovernmental operating revenues as a percentage of gross operating revenues 38.37% 40.83% 37.54% 37.40% 40.51% 38.81% 38.39% 38.80% 39.17% 38.84% Description: Intergovernmental revenues (revenues received from another governmental entity) are important because an over-dependence on such revenues can be harmful. The federal and state governments are struggling with their own budgetary problems, and frequently they have withdrawn or reduced payments to local governments as one of their cutback measures. Local governments with budgets largely supported by intergovernmental revenues have been particularly harmed during this period, but almost all local governments have shared the pain. The reduction of intergovernmental funds leaves the municpal government with the dilemma of cutting programs or funding them from general fund reserves. Nevertheless, a municipality might want to maximize its use of intergovernmental revenues, consistent with its service priorities and financial condition. For example, a local government might want to rely on inter-governmental revenues to finance a federally or state mandated service or to fund a one-time capital project. The primary concern in analyzing intergovernmental revenues is to know and monitor the local government's vulnerability to reductions of such revenues, and to determine whether the local government is controlling its use of the external revenue--or whether these revenues are controlling local policies. 17

21 Indicator 4 Analysis Elastic Tax Revenues Sales Tax Sales taxes should be considered separately from other revenues because most local governments rely heavily on it. A decline or a diminished growth rate in taxes can have a number of causes. First, it may reflect an overall decline in national, state, or local economic health; a decline in total number of households; or the movement of retail or industrial operations to other communities. Second, it may result from sales taxpayers moving their base of operations to other jurisdictions. Warning trend: Decline in tax revenues. This is a health of the community indicator. Depending on state statutes and home rule charters, local governments overwhelmingly use property and/or sales taxes as a major source of general governmental revenues. If property taxes and/or sales taxes are a significantly large resource for your government, you need to be especially attuned to any changes in this indicator and to try to understand their causes. Suggestions for analysis: If the warning trend is observed, try to identify the causes (Why is it happening?), assess the significance (Is it important?), and devise action strategies (What can be done?). The following are starting points for this analysis. Do revenues rely heavily on inelastic tax sources? Can more elastic taxes, such as income or sales tax, be instituted or increased? If the local government has a sales tax, can it be extended to goods and services whose sales and prices respond more directly to changes in economic conditions? Has general economic decline or the out-migration of population or business created the decline in the elastic portion of the city's revenue base? Could redevelopment programs help? Do local restrictions on taxes (e.g., on the source taxed or the amount collected) limit the elasticity of the revenue structure? Can inelastic taxes and fees be made more elastic by more frequent property assessments; routine increases in user fees or similar local legislative and administrative modifications? For Sales Taxes Are the levels of sales taxes levied in the community driving consumers to shop in other communities? Are retail outlets relocating outside the community or are new retail stores outside the community attracting consumers? 18

22 Are retail companies properly reporting all sales taxes collected from sales in the community? Can an economic development strategy be designed that will increase the taxable property values, number of retail businesses, or level of income in the community? Suggestions for policy statements: It would be difficult to set an exact target for the proportion of elastic to inelastic revenues, but the following policy statements can help local officials relate this indicator to their financial decision making. A balance will be sought in the revenue structure between the proportions of elastic and inelastic revenues. New sources of revenue will be sought to achieve the desirable balance. Each time a new revenue source or a change in the rate of an existing source is considered, the effect of this change on the balance of elastic and inelastic revenues will be thoroughly examined. 19

23 INDICATOR 4 Elastic Tax Revenues(Sales Tax) Elastic revenues as a percentage of net operating revenues Warning Trend: Decreasing amount of elastic operating revenues as a percentage of net operating revenues Formula: Elastic operating revenues Net operating revenues 40% 38% 36% 34% 32% 30% Fiscal Period Fiscal year: Net operating revenues 12,992,865 14,033,611 13,837,763 16,052,810 18,820,335 18,566,629 18,255,637 16,100,439 15,001,076 15,185,519 Elastic operating revenues * 5,019,735 5,035,165 5,310,375 5,590,010 6,720,498 6,885,779 6,811,025 6,093,607 5,456,786 5,373,898 Elastic operating revenues as a percentage of net operating revenues 38.63% 35.88% 38.38% 34.82% 35.71% 37.09% 37.31% 37.85% 36.38% 35.39% * Elastic operating revenues are revenues from taxes that have a taxable base which are expected to reflect general economic changes in the short term. Description: The yields of elastic revenues are highly responsive to changes in the economic base and inflation. As the economic base expands or inflation goes up, elastic revenues rise in roughly proportional or greater amounts, and vice versa. A good example is sales tax revenue, which increases during good economic periods with the increase in retail business and declines during poor times, even though the tax rate remains the same. Yields from inelastic revenue sources, such as license fees or user charges, are relatively unresponsive to changes in economic conditions and require that government officials change fees or charges to obtain a change in revenue. The yields from these revenues lag behind economic growth and inflation because local legislative bodies are reluctant to increase them each year. Property taxes can be elastic or inelastic depending upon the local government involved. If properties are reassessed frequently, then this source of revenue can be considered elastic. If a local government has a set tax rate and properties are not reassessed frequently, property tax revenues may be inelastic, especially in times of economic growth. If a local government levies a specific property tax dollar amount each year, property tax revenues are again inelastic, unless the policy making body has a policy of increasing taxes to track inflation on an annual basis. A balance between elastic and inelastic revenues mitigates the effects of economic growth or decline. During inflation, it is desirable to have a high percentage of elastic revenues because inflation pushes up revenue yield, keeping pace with the higher prices the government must pay. If the percentage of elastic revenues declines during inflation the government becomes more vulnerable because inflation pushes up the price of services but not the yields of new revenues. The reverse is also true--during a recession, a high percentage of inelastic revenues is an advantage. This insulates the tax base to some degree from the reduced yield it can receive during a recession. 20

24 Indicator 5 Analysis One-Time Revenues Warning trend: Increasing use of one-time operating revenues as a percentage of net operating revenues. Suggestions for analysis: If the warning trend is observed, try to identify the causes (Why is it happening?), assess the significance (Is it important?), and devise action strategies (What can be done?). The following are starting points for this analysis. Are one-time revenues being used to fund ongoing expenditures as opposed to one-time expenditures? What is the probability that these revenues will cease to be available? Is there a contingency funding plan? If one-time revenues are being used for one-time expenditures, such as a new building, are there other, ongoing revenues to pay the operating expenses of the building and the programs it will house? Is the use of reserves or balances from prior years significantly reducing the government's ability to weather unexpected financial problems, such as natural disasters or a surge in inflation? Is the government experiencing operating deficits (i.e., an excess of current expenditures over current revenues)? See indicator 14, Operating Deficits. Suggestions for further analysis: If the trend analysis shows a high or increasing level of reliance on one-time revenues, you may want to pinpoint what the one-time revenues are, how they are being used, and what the prognosis is for their continued availability. A chart containing the following information would be helpful: Source of revenue - List the sources of one-time revenues and identify the service or expense area to which they contribute. Service it funds or contributes to- Is service one-time or continuing- determine whether the service is a one-time expense (such as a special clean-up program) or an ongoing program? Is service essential (Rate 1-5) - Note how essential this service is to the local government and its citizens. Rate the service from 1 (very essential) to 5 (not very essential). Other possible revenue sources - List the revenues or decreases in expenditures that could replace the one-time revenue if necessary. 21

25 Suggestions for policy statements: While it would be difficult to set target levels for one-time revenues in your revenue structure, policy statements can be developed for procedures in the use of one-time revenues. The following policy statements can help local officials relate this indicator to their financial decision-making. One-time revenues will be used only after an examination determines whether they are subsidizing an imbalance between operating revenues and expenditures, and then only if a long-term (three-to-five-year) forecast shows that the operating deficit will not continue. One-time revenues will be used only for one-time expenditures. 22

26 INDICATOR 5 One-time Revenues Warning Trend: Increasing use of one-time operating revenues as a percentage of net operating revenues Formula: One-time operating revenues Net operating revenues 1.20% 1.00% 0.80% 0.60% 0.40% 0.20% One-time Revenues 0.00% Fiscal Period Fiscal year: Net operating revenues 12,992,865 14,033,611 13,837,763 16,052,810 18,820,335 18,566,629 18,255,637 16,100,439 15,001,076 15,185,519 One-time operating revenues 63,588 78, , , ,568 91, , ,429 94,187 66,455 One-time operating revenues as a percentage of net operating revenues 0.49% 0.56% 1.04% 0.77% 0.73% 0.49% 1.04% 0.98% 0.63% 0.44% Description: A one-time revenue is one that cannot reasonably be expected to continue, such as a single-purpose federal grant, an inter-fund transfer, or use of a reserve. Continual use of one-time revenues to balance the annual budget can indicate that the revenue base is not strong enough to support current service levels. It can also mean that the government is incurring operating deficits and would have little room to maneuver if there were a downturn in revenues (such as occurs during a regional or national recession or because of the sudden expenditures occasioned by a natural disaster). Use of one-time revenues increases the probability that the government will have to make large cutbacks if such revenues cease to become available, as may happen when the federal government reduces a major grant program or when reserves are depleted. 23

27 Indicator 6 A&B Analysis Sales Tax and Property Tax Revenues Property and sales taxes should be considered separately from other revenues because most local governments rely heavily on them. A decline or a diminished growth rate in taxes can have a number of causes. First, it may reflect an overall decline in property values; a decline in national, state, or local economic health; a decline in total number of households; or the movement of retail or industrial operations to other communities. Second, it may result from default on property taxes by property owners or an inefficient assessment or appraisal process for property. Third, it may result from sales taxpayers moving their base of operations to other jurisdictions. Finally, a decline can be caused by deliberate default by property owners who realize that delinquency penalties are less than short-run interest rates and that nonpayment is thus an economical way to borrow money. Likewise, citizens who owe income taxes may deliberately delay payment. This is a health of the community indicator. Depending on state statutes and home rule charters, local governments overwhelmingly use property and sales taxes as a major source of general governmental revenues. If property taxes and sales taxes are a significantly large resource for your government, you need to be especially attuned to any changes in this indicator and to try to understand their causes. Note, again, that this indicator calculates the trend of tax revenues over the years in constant dollars. When presenting this indicator, you should show it for each of the three types of taxes, if applicable, and also in both constant and current dollars to help display the impact of inflation on tax revenues. For property taxes, whether they are increasing or decreasing, you could construct a table that shows property taxes by type (real vs. personal) and by class (residential, commercial, industrial) for the period you have chosen. The table should enable you to identify sectors in which change has occurred. To demonstrate the impact of changes, you could also compute the rate of change in property tax revenues (current year minus prior year; remainder divided by prior year) and graph these figures. Warning trend: Decline in tax revenues (includes General and Debt) (Constant dollars) Suggestions for analysis: If the warning trend is observed, try to identify the causes (Why is it happening?), assess the significance (Is it important?), and devise action strategies (What can be done?). The following are starting points for this analysis. 24